Paul Krugman's Nostalgianomics: Economic Policies, Social Norms, and Income Inequality

Abstract

What accounts for the rise in income inequality since the 1970s? According to most economists, the answer lies in structural changes in the economy - in particular, technological changes that have raised the demand for highly skilled workers and thereby boosted their pay. Opposing this prevailing view, however, is Princeton economist and New York Times columnist Paul Krugman, winner of the 2008 Nobel Prize in economics. According to Krugman and a group of like-minded scholars, structural explanations of inequality are inadequate. They argue instead that changes in economic policies and social norms have played a major role in the widening of the income distribution.

Krugman and company have a point. For the quarter century or so after World War II, incomes were much more compressed than they are today. Since then, American society has experienced major changes in both political economy and cultural values. And both economic logic and empirical evidence provide reasons for concluding that those changes have helped to restrain low-end income growth while accelerating growth at the top of the income scale.

However, Krugman and his colleagues offer a highly selective and misleading account of the relevant changes. Looking back at the early postwar decades, they cherry-pick the historical record in a way that allows them to portray that time as an enlightened period of well-designed economic policies and healthy social norms. Such a rosy-colored view of the past fails as objective historical analysis. Instead, it amounts to ideologically motivated nostalgia.

Once those bygone policies and norms are seen in their totality, it should be clear that nostalgia for them is misplaced. The political economy of the early postwar decades, while it generated impressive results under the peculiar conditions of the time, is totally unsuited to serve as a model for 21st-century policymakers. And as to the social attitudes and values that under girded that political economy, it is frankly astonishing that self-described progressives could find them attractive.

Keywords: income inequality, income structure, winner-take-all markets, superstar markets, paul krugman, great compression, treaty of Detroit, nostalgianomics, skill-biased technical change, SBTC

JEL Classification: B00, D31, D20, D21, H11, I30, J10, J20, J31, L10, N32, N22, N42